Bull Vs. Bear - America Will See Another Recession Soon

Bear's ResponseDespite the Federal Reserve's best efforts to revitalize the U.S. economy, it seems that another recession could be looming on the horizon. Several pieces of key data are pointing to another prolonged downturn for the United States, as global woes begin to take their toll. From poor job growth and manufacturing output to lower retail sales and rising price inflation, things don't look good for the U.S. in 2013. Overall, the lack of confidence from businesses and consumers has all but put the last nail in the economy's coffin. Add in the various global woes from Europe and China, and it's enough to make even the proudest bear run for cover.

The Data Doesn't Lie Investors may want to get ready for a repeat of 2008/2009, as another recession could be making itself known in the new year. Economic data from across the board is pointing downwards as global growth has stalled.

First, employment growth seems to have slowed down. After rising at a relatively quick pace during the first half of 2012, the number of workers on nonfarm payrolls has quickly stagnated over the last few months, as businesses focus on the election and the impending fiscal cliff. Over the first six months of the year there were roughly 96,670 jobs created per month. This figure is far below the 125,000 that economists say is needed to simply hold the jobless rate steady, never mind decreasing it.

According to estimates from Reuters, employers are expected to only add 113,000 jobs to their payrolls in September. That will cause the unemployment rate to increase by a tenth of a percentage point to 8.2%, as hiring likely fell short of the pace needed to absorb both new and returning job seekers. While private sector firm ADP (NYSE:ADP) did show larger than expected job growth in September according to its numbers, the amount is still only a small step towards shrinking the overall unemployment rate. The U.S. economy is still about 4.7 million jobs short of where it stood when the 2007-09 recessions hit.

The Fiscal CliffThen there is that pesky fiscal cliff to deal with. If Congress fails to act and avoid the automatic tax hikes and government spending cuts, roughly $500 billion will be taken out of the economy next year. Back in June, the nonpartisan Congressional Budget Office (CBO) reported that "unless lawmakers move to avert scheduled tax increases and spending cuts at the end of this year, a recession is likely." This would be the first time that the CBO has forecast any recession resulting from the fiscal cliff. Overall, the CBO predicts that the U.S. gross domestic product (GDP) should contract by 0.5% over the course of the year.

Then there is the issue of slowing planet-wide growth. One of the major problems with having an integrated global economy is that when one of your neighbors sneezes, you catch a cold. That's exactly what's happening now. Due to its own debt woes, the 17-country Eurozone is also headed for its second recession in three years and that's causing all sorts of issues for other nations, including the U.S. and China. U.S. manufacturing activity actually improved slightly September. New export orders declined for a third straight month, however, because of reduced demand in Europe. For example, U.S. car manufacturer General Motors' (NYSE:GM) German unit, Opel, said it would "cut the hours of several thousand workers at its plants, due to decreased demand for new cars in Europe." All of this affects profits and revenues here at home.

Prepare Your PortfolioWith the data pointing to another recession on the horizon, investors may want to get started thinking about getting defensive once again. An overweight position to consumer staples, utilities and dividend stocks could be in order. The Consumer Staples Select Sector Consumer Staples SPDR (ARCA:XLP), Vanguard Utilities ETF (ARCA:VPU) and iShares Dow Jones Select Dividend Index (ARCA:DVY) are all great examples of how to add those sectors to a portfolio. Likewise, a healthy dose of cash, treasury bonds and precious metals might make plenty of sense as well.

The Bottom LineAs things get uglier for the U.S. economy, a new recession could be on its way. Key data points, such as low job growth and consumer confidence are all pointing to another round of pain. Now is the time for both investors and consumers to brace themselves.

At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.

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